Donald Fry: General Assembly setting stage for combined reporting push in 2011

By Donald C. Fry

Both Maryland General Assembly houses have passed companion bills that would move up the deadline – to December 2010 – for a Maryland Business Tax Reform Commission report on Maryland’s business tax structure.

The commission’s earlier reporting deadline will likely set the stage for serious consideration of legislation in the 2011 session to move Maryland’s corporate tax structure to a combined reporting method.

The commission, which has been studying combined reporting and other tax and business climate issues since May 2009, had originally been scheduled to issue its final report in December 2011. The new deadline will be December 15, 2010 under Senate Bill 336 and House Bill 395, both of which passed their respective chambers last week.

The tax reform panel has reviewed two reports from the Comptroller’s office that, after examining corporate tax information for 2006 and 2007, concluded that implementing combined reporting would have generated between $144 million and $197 million in additional corporate taxes in 2006 and between $92 million and $144 million in additional taxes from businesses in 2007.

The Department of Legislative Services estimates that implementing combined reporting would yield $111 million in additional corporate income tax revenue in FY 2012, increasing to $131.5 million in increased revenue by FY 2015.

Combined reporting requires corporations to include, in its tax computations, certain Maryland-related business activities of corporate affiliates outside the state.

Advocates view the potential implementation of the combined reporting method as a “no-brainer,” an easy way to achieve a 13 – 20 percent annual windfall of additional tax revenue from Maryland’s corporate community. Opponents dispute the amount of new revenue that will be realized and note that the measure would generate increased accounting and bookkeeping expenses for businesses.

The Comptroller’s Office’s initial report in October included numerous caveats and disclaimers about assumptions upon which tax projections are based and warns against extrapolating findings from what were clearly economic boom years to today’s “vastly different” economic climate. Those caveats still apply, the latest report notes.

The reports also show that the overwhelming majority of additional corporate tax revenue in 2006 and 2007 would have been derived from three business sectors – retail trade, finance and insurance, and the construction industries – all of which have subsequently been hard hit by the recession.

Those three industry sectors would have paid between $96.2 million and $131.8 million in combined additional taxes in the years studied. Other sectors that would have experienced increased income taxes in both test years included firms in the wholesale trade, and accommodation and food services industries.

The sector that would have experienced the most reduced corporate income taxes in both years was the utilities industry. Other sectors that would have experienced reduced taxes in both test years included health care, arts and entertainment, and educational services.

Also worth noting: the estimates were derived based on the assumption that imposing combined reporting on Maryland’s corporate taxpayers would not cause any changes in taxpayer behavior. “In reality, that assumption likely will not hold,” the initial Comptroller’s report warns.

The slow economic recovery, coupled with the customary caveats on the fiscal impact of this tax change will lead to lively debate in the first year of the next legislative term.

Donald C. Fry is president and CEO of the Greater Baltimore Committee. He is a regular contributor to Center Maryland.

Previous Center Maryland columns by Donald C. Fry:

Wrong timing for proposal to change Baltimore City school board

Baltimore City isn’t alone in facing pension funding challenges

A government investment program that delivers

Proposed transportation fund raid — a bad habit continues

Where’s the outrage over crime?

Small business is where innovation lives